Credit worries flared up after thousands of savers lined up on Monday to pull deposits from Britain's fifth-largest housing lender, Northern Rock, which fell victim to the sharp rise in borrowing costs between banks and had to be rescued by emergency Bank of England funding last week.

Financial stocks were further hit after Bank of America , the second-largest U.S. bank, warned that recent volatility in capital and credit markets will have a "meaningful impact" on third-quarter results at its corporate and investment bank. Japan's Mizuho Financial Group, Australia's National Australia Bank, South Korea's Woori Finance and Singapore's United Overseas Bank were all on the decline.

Japanese stocks closed sharply lower. The Nikkei 225 Average shed a little over 2% -- its greatest fall in a week -- after banking shares were battered by rising global credit fears. Shares in megabanks took a big hit, with Mizuho Financial falling to a two-year low as investors moved to dump financial stocks after Credia became Japan's first listed consumer lender to fold, pressuring peers.

South Korea's KOSPI ended 1.8% lower, posting its biggest fall in a week, as exporters such as LG.Philips LCD and financials such as Kookmin Bank slid on worries about continued turmoil in credit markets.

Australian shares finished down 1.2%, led down by National Australia Bank and other financial firms on growing credit worries, in cautious trade ahead of a U.S. Federal Reserve rate-setting meeting.

Singapore's Straits Times Index also closed unchanged, but shares of Singapore Airlines fell as much as 1.6% to a three-week low on investor worries that record high oil prices will eat into profits.

Chinese stocks were mixed as strength in many non-ferrous metals shares offset weakness in the banking sector. The Shanghai Composite Index earlier in the session hit a fresh all-time, but fell back to close flat.